CBA-Living Trusts

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CBA

The Colorado Bar Association

1900 Grant Street, 9th Floor, Denver, Colorado 80203-4336

LIVING TRUSTS Much has been proclaimed about "living trusts." Many of the advertisements for living trusts make it seem that you must have one to die as a responsible citizen.
In truth, a living trust can be expensive and you can achieve the same tax savings with a will.

This pamphlet will explain a "living trust' ' (sometimes called a revocable trust), how it is created, what it may or may not accomplish for you and under what circumstances it may be appropriate.

One warning: Before you sign any documents, be sure to have your attorney or tax advisor examine the legal and tax questions. Be wary of any advisor who refuses to let you review the trust with an attorney or other advisor before you buy or who won't allow you time to consider the matter thoroughly.

What is a living trust? A trust is when you give assets to someone for safekeeping. A living trust is where you put assets into a trust that you can change or revoke at any time. You are both creator of the trust, and while you are living, the beneficiary of the trust.
During your lifetime, you (and your spouse, if that's the arrangement) may receive monetary distributions from the trust. After your death, distribution of the assets held in the trust is made to the remaining beneficiaries specified in the trust agreement. If all property was transferred to the trustee during a person's lifetime, probate of that person's estate will not be necessary.

What is probate? Probate is the legal process that insures your will is valid, your debts are paid and your property goes to the people you name in your will.

Should probate be avoided? A living trust can make probate unnecessary. Advertisements of some living trusts would have you believe that probate is extremely burdensome and something to be avoided at all costs. However, because of the Uniform Probate Code, in Colorado probate is a relatively simple, inexpensive and quick procedure for the distribution of a decedent's estate.
During probate, no court involvement is necessary for most estates. (Court supervision is available should disagreements and conflicts arise.) Assets are generally not tied up for more than six to ten months. Delays in distributing assets shouldn't be greater with the probate process than with a living trust. In both cases, a personal representative (administrator) and trust trustee must protect themselves from liability for premature distribution of assets before creditors and taxes are paid.

Can a living trust save taxes? The living trust avoids no more estate tax than a will. (Avoiding probate never means avoiding estate tax.) Both a will and a living trust, when well written, can save substantial family assets which would otherwise be used for payment of estate taxes.
Under current law, if the total assets at death are under $600,000, no federal estate taxes or Colorado estate taxes will be imposed.

Can creditors reach assets in a trust? Yes. Present and future creditors can legally get to the assets in a trust to pay outstanding bills.
Under probate, claims of creditors can be eliminated when the required notice provisions are followed.

Under a living trust, the position of creditors can actually be improved. If assets pass under a will through the probate process, the family is guaranteed an exempt property allowance and a family allowance. These allowances must be paid prior to the claims of general creditors. This priority over creditors is not available to assets passing under a living trust.

Can a trust he challenged by heirs? Both wills and living trusts are susceptible to challenge by disgruntled heirs.

What effect does divorce have upon a living trust? Under Colorado law, any gift made in a will to a former spouse is invalid. Under a living trust, which is a contract, this would not be true. Unless the trust was amended following a divorce, or unless it was clearly addressed in the divorce decree, a former spouse would receive the benefits specified.

Can a person disinherit a spouse by signing a revocable trust? No. The rights of a surviving spouse to a share of a deceased spouse's property are not avoided by having a living trust rather than a will.

Can a living trust jeopardize qualification for government assistance programs? Yes. If assets are held in a living trust created by a deceased spouse and for the benefit of the surviving spouse, who is a Medicaid recipient, such assets are counted as available resources (and the income of the trust as available income) even though the trustee may have full discretion to pay or withdraw principal or income. This is a federal rule. This is not the case where a trust is created under the deceased spouse's will for the benefit of the surviving spouse.

Are there tax considerations in using a living trust? Yes. Congress has generally written the Internal Revenue Code to favor disposition of a decedent's estate under the will rather than with a living trust. For example, a probate estate receives a larger income tax exemption than a living trust and an estate can choose a fiscal or calendar year, which can defer income taxes. Some states penalize living trusts by taxing the conveyance of land into a trust, or requiring a re-evaluation of property taxes.

Under what circumstances can a living trust prove beneficial?

If you have assets in a state that has not adopted the streamlined procedure of the Uniform Probate Code, a living trust may allow you to avoid a complicated probate administration.
If you are incapacitated, or if you are contemplating your disability, your assets would be managed for your benefit.
You may want to see how an adult child will cope with responsibility by giving them a supervised trial run.
You may no longer wish to be involved in the management of your financial affairs and you want to place your assets under management.

What are the comparative costs of wills and trusts? Although costs will vary depending on the attorney and the area in which you live, having a will prepared by an attorney can cost $150 and up, depending on the complexity of your affairs. Probating a will through a Colorado probate court can cost as little as $200 - 3,000, including lawyer fees, court costs and the expenses of publishing notices to creditors. Generally speaking, most middle-sized estates can be probated for less than $2,000 - 3,000.
Living trusts will generally run from $700 - 5,000 depending on the complexity of the trust. In addition to the cost of creating the trust, there are costs associated with transferring assets into and out of the trust, administrative expenses and some tax disadvantages.

Where do / get more information? See an estate planning attorney to help determine what estate planning arrangement best suits you. Most offer a free initial consultation. Remember that in estate planning, one size does not fit all. While your will or trust may be similar to your neighbor's, each is different for special, personal reasons.
If you think you have been the victim of fraud in the sale of a living trust, please call the Colorado Attorney General's Consumer Protection Unit at 303-866-5189 or 1-800-332-2071 and ask for the pamphlet on "Living Trust Scams".

(1995) This pamphlet is published as a public service by the Colorado Bar Association. Its purpose is to inform citizens of their legal rights and obligations and to provide information regarding the legal profession and how it may best serve the community. Changes may have occurred in the law since the time of publication. Before relying on this information, consult an attorney about your individual case.